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Now is not the time to panic

This is no time for rear-view mirror investment decisions.

It’s one thing trying to slip a fast one past a morning radio host, but to try the same line with a battery of credit ratings agency analysts will be a different kettle of fish altogether.

Last week finance minister Pravin Gordhan tried to slip in the now over-used ‘We have a good story to tell’ – line past the evergreen John Robbie on the 702/Cape Talk morning drive. It was a feeble attempt at trying to raise the national mood, which has been plunged to near-depression levels ever since the Nenegate-shambles which hit the country on December 9 last year

I have no doubt that those four days will go down in SA’s history as some of the most pivotal and desperate – an attempt to salvage the country from crashing headlong and suddenly into multiple debt downgrades, a collapse of its currency, bond and equity markets and probably a re-introduction of exchange controls, just for starters.

The really bad stuff would have come later, as rising unemployment, hunger, increased capital flight (for those who could) and skills, would have laid the groundwork for a repeat of a Zimbabwe-style collapse.

One day the true story of those political/financial high drama days will come out. The fact that Zuma recanted and changed his decision shows the immense the pressure he was under.

Kudos must go to those private sector leaders such as Mike Brown (Nedbank), Colin Coleman (Goldman Sachs) and Patrice Motsepe (African Rainbow Minerals) who realised something had to be done to save SA from collapse. There were others involved, I’m sure. On behalf of all South Africans who would not like to experience a Zimbabwe-style collapse, I say: “We salute you”.

Truth be told, we don’t have a good story to tell at the moment and I think Gordhan knows it. I also think he’s resigned himself to the fact that we will be downgraded to junk status, if not in June then definitely in December. Lack of growth is our biggest weakness currently and it will take a drastic turnaround in government’s political strategies to boost our growth rates. I don’t see it happening soon.

Downgrade looming

All eyes will be on the Moody’s team when it arrives in South Africa for an inspection and meeting with key players before formulating its ratings view.

Moody’s currently has a rating for SA’s debt one notch higher than those of ratings agencies Fitch and Standard & Poor’s. The latter two have ratings for SA according to their own respective metrics at one level above so-called junk status. A widely-expected downgrade by Moody’s would not mean an automatic downgrade by the others, but it would make it highly likely.

It will take a meaningful turnaround in our economic trajectory and some very persuasive arguments to avoid a downgrade to junk status by at least one of the major ratings agencies later this year, probably in December.

Forewarned is forearmed

For some this unfolding scenario is no surprise. A handful of independent and non-aligned economists and analysts, myself included, have warned for some time that our economic trajectory is heading for the rocks.

Those who’ve been sounding their warnings with ever-rising stridency include Mike Schüssler, Dawie Roodt, Kevin Lings and George Glynos. They’ve either been ignored or made off as economically-irrelevant.

The economists of the large banks and insurance companies, by and large, are under strict instructions to tell a ‘good story’ as I’ve written before. Bad forecasts are bad for business and even worse for your business relationship with government. But the only people who suffer are those who base their investment decisions on the good news story.

So when the Sunday Times carries an op-ed with the title ‘SA has 3 months to save itself’ by Coleman, Wiese and Cassim Coovadia (Banking Association of SA MD), you know that things are truly serious.

To quote: “We have, in essence, a window until June to announce concrete measures for ratings agencies such as Standard & Poor’s to consider as part of their normally scheduled deliberations on South Africa….

“Let us be clear: failure to act is not an option. Losing our investment-grade rating would likely trigger a poisonous cocktail of a higher cost of capital, a weaker currency, slower growth and higher inflation. It would be bad for South Africans across the board.”

There you have it.

Just how bad can it be?

Already we’re seeing a price surge in imported goods. Golf clubs, medical equipment, DStv, you name it – if it’s imported it’s going to rocket in price.

And this is only the beginning: much of what is selling now is probably old stock ordered a year or so ago.

The cash-strapped consumer has abandoned hope of keeping up with spiraling prices. Two weeks ago Edcon (Edgars) announced that it’s discontinuing many lines of imported clothing. In a frank admission it said that the consumer has given up the ghost: it cannot afford them anymore. There’s no point in keeping up with the Van Der Merwes or the Khumalos: they are as broke as you are.

Speaking at the annual Car of the Year banquet last week, Wesbank CEO Chris de Kock gave a sober, realistic assessment of the outlook for the SA motorcar industry, which he says will decline by 12% this year.

De Kock presented four potential scenarios, each supported by a substantial percentage of economists. 

The bleakest of these scenarios sees prolonged global economic weakness while SA suffers persistent low economic growth and even slips into recession. It assumes that local policymakers continue to make mistakes.

Should this pan out, with the rand falling to R22.90 to the US dollar, you could expect new car prices to increase by an astonishing 84% by 2019.

Even in a best-case scenario, supported by only 13% of the economists, one can only expect a fractional strengthening of the currency.

The most likely scenario, says De Kock, is a downgrade to junk status with a gradual weakening of the rand to R17.20 to the USD by 2019, with car prices ‘only’ increasing by 39% over this time. An entry-level new car will by then cost you R200 000.

Hang on to your old jalopy. 

Investment decisions to be made

There are times in a nation’s history when things happen over which you have no control. We are in one such time. However, what you can control is your reaction to such looming events.

Investors have a three-month period, perhaps a little longer if we’re lucky, to reconsider and rearrange, if possible, our personal investment strategies.

Many investors have been de-risking their investment portfolios by reducing exposure to local equities and listed property, in exchange for greater offshore exposure. This is apparent in Asisa’s latest figures, which show a clear swing from direct equities to multi-asset portfolios that can increase or decrease exposure to perceived risk assets.

The outflow of personal assets in the form of direct offshore investment has also risen sharply in recent months.

If I had a large living annuity which had to produce a sustainable income for life, I would drastically reduce my equity and listed property exposure and even consider ‘parking’ the money in a cash or high income portfolio which should give me a risk-free return close to 8% – about where a conservative drawdown should be pegged.

The true winners are the investors who diversified three to five years ago when the rand was strong and offshore markets were very appealing. But few took advantage of that opportunity. Retail investors are notoriously bad at market timing and more often than not look for confirmation of their investment decisions by looking into the rear-view mirror.

This is no time for rear-view mirror investment decisions. This is a time for looking far ahead, keeping eyes on the road and both hands on the steering wheel, left foot hovering over the brakes. Prepare to use them quickly. 

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@heystek.co.za.

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COMMENTS   45

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Would investing in a resource or gold company like Harmony Gold protect one’s Rands?

Just Google the words “counterparty risk”.

When TSHTF you can only protect your Rands with physical gold or silver. In your pocket. The rest has “counterparty risk”, is difficult to carry around, rusts, is not divisible and/or not liquid world wide,

‘’Would investing in a resource or gold company like Harmony Gold protect one’s Rands?’’
My view, Is that anybody (local or foreign) that are planning to invest in any gold company in South Africa should be very careful and also consider what has been happening in this market over the last decade, as silence still reigns on the shameless pillaging of Randgold.
My view also on this fraud that has been out in the public domain, and extensively covered by Barry Sergeant via various media channels, but extremely detailed in various issues of Noseweek (179, 180, etc.) where he described how silence still reigns on the shameless pillaging of Randgold (Randgold & Exploration), the victim, by the thief (JCI) and Western Areas (the beneficiary), which owned South Deep, a budding, a cash gorging gold mine.
Brett Kebble raised a total of R 1.9 billion in cash from purloining and selling Randgold’s investments.
The primary clue was that Investec Bank profited, savagely and ruthlessly in brutal cash-raising exercises in which Brett Kebble was easy meat.
The Investec Bank UK (IBUK) transaction involved the undisputed theft by JCI of 5.46 million Randgold Resources shares belonging to Randgold, the conversion of the certified shares into ADRs, and the lending to Investec Bank UK in terms of the Securities Lending Agreement or Osla.
Under Investec’s David Nurek’s reign as JC I (the thief) chairman (12/9/2005 to 9/7/2008), and also the seat of chairman at Randgold (the victim) (7/10/2005 to 9/7/2008), and under his chairmanship, Randgold’s independent forensic investigations were never given access to the records of JCI (also under Nurek’s chairmanship), for purposes of obtaining full details of what had transpired.
Randgold (the victim) was forced into mediation with JCI, the thief that stole its money!
Where in the world will this happen, but South Africa, hence my view that International investors, Rating Agencies, local investors etc. are critically aware what is happening in this country.
To add insult to injury, they might also be asking why the NPA, the JSE and its overseer the Financial Services Board, various Banking Associations, Business Against Crime (which counts Investec as one of their donors), The Independent Regulatory Board for Auditors, the mainstream/corporate media, have never said a word!
The way has been cleared – by a landmark ruling of the North Gauteng High Court on 17September 2015 – for a group of Randgold & Exploration Company Limited (Randgold)minority shareholders to proceed with a claim in open court against Investec Bank Limited (Investec) for at least R1.3 billion.
The shareholders say they have successfully tested a contention by Investec that shareholders, in the form of registered nominees, do not have locus standi (the right in law) to resort to the courts in instances of dispute.
‘’One day the true story of those political/financial high drama days will come out. The fact that Zuma recanted and changed his decision shows the immense the pressure he was under’’
I agree with you Magnus, we have reached the point where somebody in the financial world must stand up and ‘’open this can of beans’’, as we cannot allow ‘’these types of transactions and mediations’’, to go un-investigated and un-punished. The value of the stolen shares had an aggregate value at the time of R 1.6 billion, but methinks the value today could be closer to R30 billion!

It is becoming increasingly clear that the Guptas are in control of government after a bloodless coup -d’etat. The ANC are not in control any more, they are only a front for the Gupta regime.
Investors who buy government bonds are therefore in fact lending their funds to the Guptas.
That brings us to the real question bond investors should ask – what is the International Credit Rating of the Guptas?

I still wonder “who” really re-appointed Gordhan? it was not zuma

Patrice Motsepe, Mike Brown and the others involved, after persuading JZ to change his mind and not listen to that family from Saxonwold, should have asked Jacob to accompany them to the door, been given his leave pay and any moneys owed and been told to keep travelling. The letter of reference could be obtained by telephone, if he decided to seek honest employment elsewhere.
Any chairman, COE or board member that reeked such havoc on a company would have been dismissed without benefits immediately, and possibly jailed.

Thanks Magnus, look forward to your column.

“…Retail investors are notoriously bad at market timing and more often than not look for confirmation of their investment decisions …” & “…The true winners are the investors who diversified …” then what are you views on Bio Tech? In my opinion trumping up a single sector has tainted this column. Especially as that sector had become an investing fad when you were singing its praises. Bio Tech has been squashed over the past 12 months, not dissimilar to the tech bubble, people paying ridiculous valuations for unproven products that may or may not work or actually ever make money. Still trading at extremely high valuations after shedding over 30% of its value.

So the options are the same, money offshore OR rand hedges….Time for columnists to either change topic OR move on…..No offense Magnus just cut & paste previous articles more time for riding your bike along Seapoint prom…

its known as “I talk but they don’t listen”. I’ve done the same – pleading with my wife’s nieces to get out while they can. guess what “I talk but they don’t listen”!

Hey Robert I’ve been to Oz & it’s sh#t, yes I can easily get in plus my whole family, why not coz it’s boring as all hell. Granted I can’t live in Sydney (for very long) coz I can’t afford it….Reason…I don’t wish to dilute my lifestyle.

You may well be proved right with your predictions, we’re already convinced you’re a w@nker.
Good luck with the rest of it…!

Some of what you say may turn out to be true robertinsydney but be careful about being too smug about being in Australia. The Aussies unfortunately have a propensity for getting involved in warring in other countries together with their USA and UK buddies, e.g. Iraq, Afghanistan, and now Syria. And we know what kind of attention that attracts from the baddies both home and away. Keep your head down mate!

@soutie – yes I quite understand your views. the idea of giving up domestic servants, garden boys, being top dog in a small pool is hard to give up. but then I seem to think these were the same reasons the Blöchligers gave for remaining in south Africa – when they could have been in Switzerland (now that is boring as hell – snow covered mts, trains that operate on time, no corruption). anyway it is not to ME that you have to rationalise – its your kids

Ah Robert, I didn’t mention garden boys/domestic servants or Blochligers. Plus I’m far from a big dog. I just prefer SA to OZ that’s all. I’ve never been to Switzerland & have no intention of ever going there either, but you’re still a W@nker.

the net result of a downgrade will be that the (ever diminishing) rich will get richer – while the poor will get poorer AND there will be more of them. therein lies the issue of sa. since 1994 – NOTHING has been done to solve the massive income inequality between the inhabitants of the country – which are mainly (but not wholly) based on the colour of your parent’s skin. most people have now accepted there will be a downgrade – imported goods will become more expensive – but this will achieve nothing. . my greatest fear is that “the few” will become even bigger targets for the “have nots”. in conclusion I quote magnus “the true winners are the investors who diversified three to five years ago when the rand was strong and offshore markets were very appealing”. NO the true winners are those souls who turned their backs on the country of their birth so that could make a new life for them and their children somewhere else

Yawn. Please back up “nothing has been done to solve income inequality” with facts. Don’t use GINI, that doesn’t take into account transfers due to tax.

Robert we can’t all be wealthy and earn the same salary. Who would wash my car for me? A R100000 a month garden assistant??

So how about you sponsoring some of us rob? Can you put my family up for a year so so, please? Only two of us!

hmm – are you family? have offered to put up my wife’s family if they wish to get out AND CAN get out – result so far – NONE!

If you genuinely turn your back on your country you wouldn’t be commenting on a SA finance website. Just saying.

“We have, in essence, a window until June to announce concrete measures for ratings agencies such as Standard & Poor’s to consider as part of their normally scheduled deliberations on South Africa….
Does ANYONE really believe that the current Zuma clique has either the savvy or the wherewithal to do this? Current events are the result of past events and based on their history, I think not.

I hope my memory serves me correctly here.
In his wonderful book A Handful of Summers, Gordon Forbes describes a Davis Cup Final with Abe Segal as his partner.
Forbes had many little rituals before a game and in the dressing room Segal said: “stop panicking! I’ll tell you when to panic.”
They got to the final set and it the score was even with Forbes serving for matchpoint when Segal strolled over and said: “now’s the time to panic!”

And here we are.

Yep … I’ve just bought a new Renault which should last me the rest of my life. A good investment considering …

Interesting fact: The JSE has outperformed the Nasdaq Biotech index by 20% from the day before Nenegate. Hmmm…..

Listen, I AM starting to panic. This is horrible. Sometimes wish I could emigrate.

Now is not the time to panic? To (mis)quote Kipling – If you can keep your head when all about are losing theirs then you don’t understand the situation my son.

Frankly, we’re not panicking because of the seemingly inevitable looming downgrade, ours is a resources-based economy, and like our peers, Brazil etc etc, given the current commodity slump, a smack on the bum via a downgrade is due, just to remind us to diverse this economy…

The panic, the anger, the hatred, the racial squabbles, the venting out, is there because, amidst all the upheaval, we seem to have absolutely no leadership…
Magnus’s hypothetical car analogy is spot on, but think of it as a car without a driver, spinning out of control, just about to flip-over, with you desperately clinging on in the passenger seat, so panic and panic all you want, you’re well within your right to do so.

i am just tired of negativity. im not a Zuma fan but i still have hope. we all made good money since Zuma was elected. Markets were great since 2009 because the world market was good. The global market is down and so are we, not because of Zuma, but maybe our status yes. Therefore I will always believe there is hope for our land because it is not up to one man whether i make money in the market or not, it is where i choose to put my money.

Lovely comment Allistair.

The anti-Zuma sentiment (Which I must admit at times I am part of) on this site can sometimes be unbearable…
However let me say this, never under-estimate the power one man can have in dictating national cohesion, race, religious, economic or otherwise, and on the overall national mood of a country’s citizens, look no further than the damage Donald Trump is inflicting, and he’s not even president.
That’s why there’s soooo much negativity.
But I do hope you’re right, and that there is indeed still hope.

@ titanium, for sure , and i agree 100%. My comment was more in line with the fact that Zuma will not determine whether I can make money or not, because it is my decision where i invest.

“…We all made good money since Zuma was elected…” Depends on what you mean by “we all”. Whilst the rich and the comfortably off may have seen a rise in their fortunes, the poor masses have not. The ANC government has done absolutely sweet f*** all for them. And they are in the huge majority.

Left foot over the brake? don’t you use your right foot to brake?

Looking at the way many South Africans drive, I don’t think they have either foot over the brake. 😀

Magnus, for your next article please write on investmenting offshore. Like getting tax clearance and opening an offshore bank account. What brokers accounts to use where you dont have to pay ridiculous annual fees for asset swops. Brokers accounts where you are able to invest in all international stock exchanges, ETF’s and bonds as an South African citizen. Capital gain tax ect. Rather focus on the solutions for an individual investors than rumbling on about SA’s poor economy and the rating agencies. I think for the past 3 months it is made clear that SA is stuck between a rock and a hard place. We get it. Point taken. Now lets move on and Focus on possible solution for the individual investors. Not all are fortunate enough to packup their bags and emigrate elsewhere, but we have to take responsibility of managing our funds with care in times like these.

Hi there. I agree. It would be great if you can write a piece on this. Please provide us with some options to invest offshore and hedge against the rand. I am a young working individual and I am starting to panic that the near future may deplete the little savings I have. Thank you in advance.

If you consider the cost of investing off shore it is still a good way to hedge against the rand by using a zero up front cost local global fund. Just invest directly and not via a CFP who takes up to 3.5% of money invested. Buy adding to the fund in rand at times of rand strength in the long term of rand weakness your invest would do very well. Typical TER for global equity unit trust funds is 1%. For that 1% you are buying a bargain using the fund managers skill to select the right shares.
Investing directly off shore is only worth a lot to boast around the braai but not always worth the effort and cost. One can also have some money in a local unit trust with all the assets globally in close to cash instruments. Momentum International Income have the fund spread 33% between euro,dollar and pound. Zero buying or selling cost.

just remember – when people realise its time to get out – the exit doors are very small!

Thanks for some good articles Magnus. As per the comments of Haiybo I can add that the Bio-Tech fund is still 30% down from the peak of the US market. Likewise a good rand based global fund is up 17%. The Alsi as well as a lot of ZA equity funds are down only 4%. Over 6 years with the rand being hammered the out performance of the Bio-tech fund is only 10% if measured against a good ZA equity fund. Any sector fund dropping 30% in 2 months has to be seen as high risk. All % quoted are rand based.
As we know all media ppl will always look for local events as the reason for the state of the market. I still rate ZA a great place to invest. Why?? We have great retail, banking and companies in other sectors. Being in the middle of the globe we can move with events to the east and west.
May I point out that ZA is one of a few markets that has not officially been in a bear market as we have not dropped 20% from the previous peak. Spread ur risk and investing will be more fun.

there is a time to buy and time to sell. bio techs hit a high just over a year ago (which is when I got out). the BIG story at moment is Valeant Pharmaceuticals-http://www.fool.ca/2016/03/19/the-epic-collapse-of-valeant-pharmaceuticals-intl-inc-continues/

Hey soutie! Think Oz is as boring as all hell? You’ve just got to try Canada!

SA might be many things & lots could be classed as negative but hey it’s not boring….! OZ is absolutely pedestrian by comparison. The only excitement I had there was meeting some of the cast of “One flew over the cuckoo’s nest” who came in from the “outback” areas.

love your comment.

It can be boring here
When we arrived here we used to fall asleep during the news
The issues they have here in Canada are miniscule and irrelevant compared to SA
They once fired a minster for hiring a limo in London, and horrors of all horrors, for ordering a $12 glass of orange juice

I guess boredom is still preferable to the horror of a Zupta government

just saw an IMAX on building the rail thru the rockies – made me laugh. they took 100 years to get thru blue mountains – which are not mountains – but hillocks -going west from Sydney to the bush. obviously aussie rail builders somewhat more laid back than their Canadian counter parts!

Thanks Magnus! Couldn’t help thinking of Cpl. Jones in the sitcom ‘Dad’s Army’ with his famous catchphrase “Don’t panic…don’t panic….”

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